Porter’s Five Forces
Amanda Whitaker
Description
Porter’s Five Forces is both a modifier and a method that creates
a framework to assess competitor rivalry within an industry based on five main
categories of factors: Bargaining Power of Suppliers, Bargaining Power of
Buyers, Threat of New Entry, Threat of Substitutes, and Rivalry of Competitors.
Porter’s Five Forces “is used most often to determine the ‘attractiveness’ of
an industry, and this is certainly indispensible for companies and investors
deciding whether to exit, enter, or invest in an industry (Magretta, 2011).”
Strengths
·
Can be applied to a variety
of industries. Porter’s Five Forces can be applied to most any
industry within the Business/Competitive realm of Intelligence. It is a
business tool, so it is very flexible within that area.
·
Good place to start when
assessing or formulating strategy. This model is very useful when a company is trying to decide what
strategy to pursue because organizes all of the relevant information in such a
way that one can get a broad view of what they are dealing with.
·
Answers the question of
what is going on in the industry. When all of the information about the industry is outlined in this
model, it easily and clearly shows the company what their industry looks like.
·
Encompasses
relationships that are fundamental to all commerce. The model makes it easy for the company
to visualize how the relationships work, especially in regards to the
Bargaining Power of the Buyer and Supplier as well as the Existing Competitive
Rivalry within the industry.
·
Best used when assessing
broad levels of an industry. The
model makes it easy to view the industry from a macro-level perspective.
·
Provides a nice visual
representation of an industry.
The model is set up in such a way that it makes organizing information very
easy and very clear so that a clear vision of the industry is perceived.
Weaknesses
·
Defining the industry is
difficult. Sometimes a company can serve in multiple
industries which could make it harder for the company to choose which one is
having the most impact.
·
Most applicable to
analyzing simple market structures. When assessing more complex aspects, the process will not yield
strategically relevant information because that is not what the model is meant
to do.
·
Only focuses on one aspect
of the market environment. There are many other
aspects of the business realm outside of the Five Forces that impact a company
and how it should strategize to become as successful as possible.
·
Model is very static, so it is only useful for short or medium
range objectives. The model is very focused on the present and
does not allow for past information to be incorporated into the process.
·
False conclusions can occur when the model is taken as fact. Especially for this problem because the model is used as a
modifier rather than a method, the use aims more towards being a brainstorming
tool which does not yield strategically relevant information.
·
Results are highly dependent on the analyst(s) using it which
allows for bias. Due to the fact that the analyst(s) do the
research, input the information, and weights the impact of the forces without
using a more structured technique means that there is a lot of room for error.
How-To
Step 1. Define your industry. Obviously, one must know which industry they are a part of so that
they can research and analyze the most relevant and correct information.
Step 2. Organize observations of relevant factors in each
category. This will ensure that the information is organized effectively and
can be analyzed in the right context.
Step 3. Mark the key factors on
the diagram and summarize the size and scale of the forces. This step is the
analysis step that will ultimately have the biggest impact on what the company
decides to do next to be the most successful.
Step 4. Look over the situation
and see how it affects you. This will help the analyst form an idea of what
strategy makes the most sense to pursue.
Step 5. Based on your analysis
of the situation, determine what would be most beneficial for your group to do
moving forward. This step determines what the company will do next to develop
and improve their success.
Personal Application
Porter’s Five Forces was applied to the law enforcement/national
security problem of illicit drug trafficking in and through Kazakhstan as a
business of crime type of model. Because the point of Porter’s Five Forces is
to assess competitive rivalry within an industry, for this specific problem the
analyst must look at it through the lens of an analyst working for a drug
cartel or organized crime group that would like to get into the drug
trafficking industry in Kazakhstan.
In order to start the process of researching, it is helpful to
create a blank version of the Porter’s Five Forces model. While researching,
keep in mind all of the different aspects that that make up each of the Five
Forces so that the information can be filled in and organized from the beginning.
In order to do this when applying the Five Forces to problems outside of the
Business/Competitive realm, the analyst will need to translate the terms into
terms that fit with their problem. This may take some time depending on the
complexity of the problem. Once the translations are done, the difficulty of
the project will most likely decrease.
For this specific problem, finding good, specific information was
a challenge which probably affected the outcome. If the analyst seeks out the
assistance of subject area experts like was used in this example, then that
could help mitigate some of those intelligence gaps. It is also important to
note that when using this method/modifier, especially in a realm outside of
Business, there will be specific factors within the Five Forces that either
will not apply to the analyst’s problem or cannot be translated effectively
which are issues that the analyst must be aware of.
Once the research is complete and the information is organized
into the forces, the next step is to determine which forces have the most
impact on the analyst’s “firm” which in this case is a drug cartel or organized
crime group. In order to do this, each of the forces can be weighted with a
“++” which signifies that that force is very much in favor of the analyst’s
firm, a “+” which signifies that the force is in favor of the analyst’s firm, a
“- -” which infers that the force is strongly against the analyst’s firm, or a
“-” which suggests that the force is against the analyst’s firm.
In this specific problem, the Threat of New Entry received a “- -”
based on the research. The most important factors to this force is that there
are very low barriers to entry into the illicit drug trade and very many
government and international efforts to combat this problem that are in place. The Bargaining Power of the Buyer received a
rating of “-” mainly due to the low switching costs of buying from another
individual or organization. The Bargaining Power of the Supplier received a
score of “+” mainly due to no price floor or ceiling that is in place and
because there are no regulations, hence no limit on how much of the product can
be produced. The Threat of Substitution received a rating of “+” due to the
fact that the product itself is basically static which implies a low threat of
substitution. If a person wants a certain drug, then they want only that drug
and will most likely not switch to another product. Lastly, Competition Among
Existing Competitors received a rating of “-” because there are similar
products throughout the industry (not much room for differentiation), there are
hundreds of existing competitors and the number is still growing pretty
rapidly, and there is also a large market for illicit drugs.
Based on that information, the analyst can infer that there are
more reasons against entering the illicit drug trade than there are reasons for
it, so in the context of this model it does not make much sense for a new
cartel or organization to get involved. Even so, there are other possible reasons
outside the context of this model that can have an effect on whether or not it
is a smart business decision to enter the illicit drug trade.
For Further Information
Magretta, J. (2011). Understanding
Michael Porter. Boston, MA: Harvard Business School Publishing.
[1]
CGMA. (2013). Porter’s five forces of
competitive position analysis. Retrieved from: http://www.cgma.org/Resources/Tools/essential-tools/Pages/porters-five-forces.aspx?TestCookiesEnabled=redirect
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